The Economist: A lack of assets

By Ray Perryman
March 8, 2014 at midnightUpdated March 7, 2014 at 9:08 p.m.

A recent highly publicized study found that 44 percent of American families are "liquid asset poor" with little in savings.

The analysis by the Corporation for Enterprise Development (CFED) noted that "these families continue to exist in a state of persistent financial insecurity, making it difficult to look beyond immediate needs and plan for a more secure future." The study ranked the states, and Texas came in a dismal 37th for outcomes and 41st for effective policy to try to deal with the situation, with a full half of families here living in "liquid asset poverty." While I would agree with some of the problem areas the report raised, I believe the study ignored some important patterns, particularly when it comes to conditions in the Lone Star State.

First, it is important to note that the personal savings rate has been falling for decades. The Bureau of Economic Analysis within the U.S. Department of Commerce tracks personal savings as a percentage of disposable personal income (which is simply income less personal income taxes). In the 1960s and 1970s, the personal savings rate generally stayed within a 10 percent to 13 percent range, with rare dips below 10 percent for a few months at a time. Beginning in the mid-1980s, however, the rate began to drop significantly, bouncing between 7 percent and 8 percent for much of the decade and falling another percentage point by the 1990s. The rate has been below 5 percent for most of the 2000s and stood at just under 4 percent at the end of last year.

One reason for the decline in the rate of savings is the availability of easy and relatively inexpensive consumer credit. One purpose of savings is to allow for major purchases, and many people choose to use credit instead (particularly when interest rates are low). Available balances on credit cards can also be tapped in the event of unexpected expenses or an unanticipated setback in income, removing another reason for keeping a cash reserve.

The relationship between savings and economic growth is somewhat inverse, with bad times leading people to save more. Decades ago, on the heels of the Great Depression, savings was a much higher priority than it is for many families today. In fact, the CFED study found that the liquid asset poor are typically employed (89 percent), white (59 percent), and have at least some college education (48 percent). Fully 25 percent of them are middle class households earning between about $56,000 and $91,000 per year, with presumably some flexibility to save if it were deemed a top priority.It must be noted, however, that the excesses in consumer credit prior to the mortgage meltdown have led to what are likely overly restrictive policies for extending consumer credit in recent years, thus somewhat destroying the underlying paradigm that many have operated under with little or no warning. Moreover, credit card debt levels are something of a concern in their own right; although many have reduced their balances since the Great Recession.

Looking at how Texas stacks up, the biggest weaknesses were in the areas of health care (because of the state's high proportion of uninsured residents, unwillingness to enact policies to promote adequate access and even outright frustration of efforts to obtain coverage under the Affordable Care Act) and income (with higher poverty rates, though lower average credit card debt and bankruptcy rates). Education was pointed out as a place in which improvement is needed; I agree. However, the study ranked Texas 34th for businesses and jobs, and I see this one differently.Since 1990, the United States has added some 28.2 million to total nonfarm employment (according to Bureau of Labor Statistics data), from about 109.2 million in December 1990 to 137.4 million in December 2013 (a nearly 26 percent total increase). Of course, there was a large dip during the Great Recession, falling from 138.4 million in January 2008 to 129.7 million three years later. The nation still needs to add almost a million jobs to get back to the pre-recession level. Some states are still suffering with very high unemployment, very little hiring, and otherwise very poor economic conditions. In Texas, total nonfarm employment grew from almost 7.2 million in December 1990 to 11.3 million in December 2013. This gain of 4.1 million represents about 57 percent growth. Moreover, while not totally untouched by the national downturn, Texas regained all jobs lost by mid-2011, and has now surpassed the prior peak (of about 10.6 million) by hundreds of thousands of jobs. We have work to do, but at least the Texas economy is generating the most important aspect of personal financial security: job opportunities.

Some statistics pointed out within the CFED report are disheartening. For example, the study indicates that households of color have about one tenth the average net worth of white households, are far less likely to own a home, and far more likely to be liquid asset poor. It is also undesirable for Texas to scrape the bottom of the barrel in rankings for health care outcomes and financial assets and income policies. However, these negative findings (while clearly in dire need of addressing) are offset to a notable extent by the far greater opportunities available here than in most of the United States.

M. Ray Perryman is president and CEO of The Perryman Group (perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.